October 26, 2018
Moody’s Back on Our Minds
What we know
We started the week with the market’s attention focused on the Medium Term Budget Policy Statement on Wednesday and as such, Monday and Tuesday predictably saw a relatively narrow range of trade of 14.25-14.40.
The most notable action in the local currency started after SA trading hours on Tuesday and continued through Wednesday morning, as traders started to position themselves fairly bullishly ahead of the start of Minister Mboweni’s announcement. While we anticipated a reasonably uneventful statement, followed by possible strengthening, this anticipatory rally did seem somewhat overdone to us.
Needless to say, we all know what happened next: worse than expected debt levels in the coming years, a higher than anticipated budget deficit, weaker GDP growth and continued SOE bail-outs. It made for a more disappointing budget than many thought likely. Furthermore, actions and solutions to address these remain elusive at present. The ZAR’s reaction was therefore quite predictable, immediately losing 2% and closing the offshore trading session at 14.60, 3% from the best levels of the day.
Attention turned rapidly to the impact the announcement could have on a Moody’s downgrade, with any weak long-ZAR positions quickly being exited. Nevertheless, the ZAR did manage to stabilise around 14.45 – 14.60, before starting to drift weaker this morning. The other major local data releases were CPI and PPI, which both printed largely in-line with expectations and hence had a negligible influence on the market.
Globally, risk sentiment in general remains elevated, as global markets continue to swing wildly in response to some weak US corporate earnings releases, geopolitical tensions and still elevated US yields. Evidence of the heightened risk has been illustrated by a stronger gold price (currently $1,237) – which is at least potentially ZAR-positive – and the USD retesting this year’s highs.
The main other global news item was the ECB decision to keep rates steady yesterday. While unsurprising, the announcement, together with ongoing concerns around Italy and the European Commission’s demand that they revise their budget, saw the EUR weaken close to its one-year lows seen in August. ZAR at the time of writing is 14.70.
What others say
22 October 2018
Reuters – South Africa’s Latest Finance Minister Walks Budget Tightrope To Fix Ailing Economy
“With the government facing a ballooning debt, stubbornly high unemployment, struggling state companies, and dwindling coffers, Tito Mboweni, a former central banker only two weeks in the top finance job, will have to walk a tightrope to breathe new life into Africa’s most industrialised economy. Mboweni’s budget speech comes as President Cyril Ramaphosa tries to woo investors after years of weak economic growth and analysts are also watching to see if the budget will include concessions to attract investors.”
23 October 2018
Business Day – Rand Weakens As Geopolitical Risks Take Toll
“The rand was weaker against major global currencies on Tuesday afternoon, with global sentiment subdued as investors weighed the costs of protracted geopolitical tension. Sentiment may finally be caving under the weight of numerous underlying risk factors in the markets right now, such as US interest rates, Brexit, Italian debt, trade wars or emerging markets,” said Oanda analyst Craig Erlam.
24 October 2018
Reuters – South Africa Sees Wider Budget Deficits, Halves Growth Forecast
“In a medium-term budget policy statement (MTBPS), the Treasury said the budget deficit estimate for the 2018/19 fiscal year widened to 4% of GDP from 3.6% previously. The budget deficit is seen rising to 4.2% in the next two years, the Treasury said. The Treasury also halved the growth forecast for this calendar year to 0.7%.”
25 October 2018
Business – Outlook For Rand And Bonds Clouds Over
“The all share closed 1.47% higher on Thursday, more than recovering from Wednesday’s 0.57% fall. Shortly after the JSE closed, the rand was about 40c weaker against the dollar from when finance minister Tito Mboweni began his speech… The budget was “candid and disappointing”, said Nedbank strategist Mehul Daya, serving as a “double whammy” for the rand.
“The rand and local bonds were facing both local and external headwinds, including a stronger dollar and tighter global financial conditions,” he said.
Fin24 – Rand Falls With Bonds As Mini Budget Clouds Rating Path
The rand weakened the most among emerging-market peers and bond yields climbed to the highest this year as the government’s latest debt projections increased the probability of a credit-rating downgrade that would move South Africa’s local-currency debt into junk status… Foreign investors own 38% of South Africa’s R1.97trn of local-currency bonds, making the country vulnerable to capital flight. Outflows could reach $5bn should the country lose its membership of the WGBI, according to Bank of America Merill Lynch.
26 October 2018
RMB Global Markets
His [Mboweni’s] candour was refreshing but let’s not embellish the facts. The highly-anticipated release was met with disappointment, evidenced by the almost immediate sell-off in the rand, as the market expected more aggressive fiscal consolidation and a return to a primary surplus over the medium-term expenditure framework.
While Treasury is at pains to maintain the expenditure ceiling, the consolidated budget deficit is expected to overrun the February estimates by 0.4ppt in 2018/19 and by 0.6ppt and 0.7ppt in the following two years, implying a widening to -4.2% of GDP by 2020.
The cause: sustained revenue shortfalls owing to a tepid growth outlook, elevated debt-service costs and higher SACU receipts. How then will government stimulate growth when their hands are effectively tied? Through the only means possible without cutting expenditure and raising taxes: the reprioritisation of funds from programmes that are underspending and underperforming. This should free up R32.4bn over the next three years, of which R15.9bn will be channelled to faster-spending infrastructure programmes, clothing and textile incentives, and the Expanded Public Works Programme.
CNBC – Dollar Nears 10-Week High Before US GDP Data
“The dollar hovered near a 10-week high on Friday as investors waited to see if U.S. economic growth figures do anything to interrupt its months of strength…The dollar index traded flat at 96.56 on Friday, after hitting a two-month high on Thursday. The gains in the dollar index were largely due to the losses in the euro, which has a 57.6 percent weighting in the index.”
MoneyWeb – Weakens On Moody’s Comments; Stocks Down
“Moody’s said a weaker fiscal outlook in South Africa’s medium-term budget policy statement issued this week was a credit negative, sending the rand weaker.“The needle for a potential downgrade has shifted higher, especially with no signs of the fiscal debt improving,” said ETM economist Halen Bothma. Investors remained skittish as Africa’s most industrialised economy struggles with ballooning debt that risks pushing its sovereign credit ratings deeper into “junk” territory.”
What we think
Last week we wrote that “…there is absolutely nothing that has changed our view from last week. We actually see the pullback into the 14.40’s as healthy and, perhaps necessary, for the currency to make a concerted move towards the 14.00 level. In the absence of any unforeseen shocks or news, our range for the week ahead is 14.00 – 14.45.”
First things first: we did not expect the MTBPS to be worse than even the worst expectations and, as such, expected to be writing today with a rand closer to 14.00 than 15.00. Nevertheless, we now find ourselves on the back-foot once again, as has been a common theme this year: just when the ZAR’s resilience seems set to lead to further gains, so we find some news or data release that causes a sell-off!
Although Moody’s indicated that they would wait until after the medium-term budget before acting in relation to our credit rating, it is unclear as to when they may make a statement. Nevertheless, it would seem as though consensus still points to a change in our outlook from stable to negative, with any potential downgrade being delayed until after February’s budget.
While not ideal, we do not believe that the ZAR price action this week has been completely discouraging, as we have seen attempts to rally in the face of bouts of weakness. Volatility has of course spiked and the outlook does feel hard to call at the moment. As things stand, given the global outlook, and in the absence of any Moody’s shocks, our immediate range for next week is 14.45 – 14.75, the caveat being that a break above 14.75 would bring 15.00 into play.
Have a great weekend!